Stock Review: LANCO INFRATECH

 

Though the Lanco Infratech stock has recovered a bit from the sharp mine per cent fall on Friday, analysts feel it is likely to be under pressure due to the ongoing litigation with Perdaman Chemicals. The Australian company filed a ` 16,733-crore (A$3.5 billion) claim against Lanco Infratech for the alleged breach of a coal supply agreement.

Given the amount involved, Lanco's financials could be impacted even if a fraction of the claim is approved. Investors will have to wait for some clarity on the issue. "The claim is huge and we do not know how the case will play out. I think investors should wait for more clarity before taking exposure," says PPhani Sekhar, fund manager (PMS) at Angel Broking.

Analysts feel Lanco share prices could have corrected much more than they have, since the Perdaman claim is almost three times the former's current market capitalisation and about 40 times its net profit for 2011. According to the Lanco management, Perdaman hasn't presented the basis for the claim, which experts believe could be overstated.

Analysts say the claim seems out of proportion, given that Perdaman had not achieved financial closure of the project. Says Shirish Rane of IDFC Securities, "We believe the sharp drop in Lanco's stock price after the news of the lawsuit becoming public appears to be overdone. There appears to be an obvious disconnect between the quantum of coal involved in the coal supply agreement (2.75 million tonnes) and the claim." While the claims may be overstated, any adverse verdict would impact Lanco's financials. The management says it will prepare a strategy after the next hearing on July 27. "It is very early. We do not know the basis of the claim. We wanted to discuss the issue but the other party wants to take the legal route. We are consulting with the best and are confident of defending our case. Post the hearing on July 27, we will come to know the basis of the claim and arguments, and will be able to draw our strategy," says J Suresh Kumar, Chief Financial Officer.

The possibility of an outof-court settlement appears distant and the other risk is that it could be a long-drawn process. "The issue may take three to six months to get resolved, even as investor concerns may persist in the near term," says IDFC's Rane. The coal mines of Griffin, which Lanco acquired in 2010, are a key strategic asset and would fuel its domestic plans in the power sector. The mines have proven reserves of 310 million tonnes and total estimated resources of 1.1 billion tonnes.

The company has capacity of 3,292 Mw, which it wants to more than quadruple to 15,000 Mw by 2015. Importantly, this comes at a time when its share prices fell about 65 per cent in the past year, due to several industry and company-specific issues. The company is already grappling with challenges on account of gas availability, augmentation of transmission capacities, delays in capacity addition and litigation on its power purchase agreement with the Haryana government pertaining to Amarkantak Unit-2, with capacity of 300 Mw.

Despite the issues, the company is expected to double its sales and net profit over the next two years, which is almost 50 per cent per cent annual growth. It is banking on capacity additions last year and those in the current year (adding 1,500 Mw). Also, analysts expect the increased traction in its engineering, procurement and construction business (more than half the total revenue), as some of the projects were postponed last year and revenues for these would be booked this year, along with execution of the scheduled projects for the year. The current order book of `30,000 crore, almost five times its latest revenue from that segment, gives it good revenue visibility.